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Paying off debt: How does a draw work?

 
 
Reply Wed 25 Nov, 2020 10:07 am
Assumption: I have an LLC with sole ownership and I take out a home equity loan to invest in the business.

Does the LLC write a check to pay off the home equity loan directly? Is that a draw? Or do I have to pay myself each month to pay the home equity loan (and pay taxes on that)?
 
jespah
 
  4  
Reply Wed 25 Nov, 2020 10:28 am
@myusername1,
Speaking as someone who works for a business credit advisory company, please don't put your home on the line for your business. Small businesses fail at the rate of about half by the time the first 5 years are up.
https://www.sba.gov/sites/default/files/Business-Survival.pdf

Essentially, what you're doing with a home equity loan is your business creditors will be able to go after your house if your business fails and it goes bankrupt with debts.
myusername1
 
  1  
Reply Wed 25 Nov, 2020 11:07 am
@jespah,
I'm glad you asked! Perhaps my information is incorrect. My understanding is that if you own 20% or more of a company, you need to sign a personal guarantee that says they can come after your personal assets if the business fails, correct? If this is correct, what is the difference between a business loan and a HE loan from a liability standpoint?
jespah
 
  3  
Reply Wed 25 Nov, 2020 12:21 pm
@myusername1,
I think you're right (I'd have to check, and I don't want to tell you the wrong thing).

If you've got business credit (I'm trying really hard not to sound like an infomercial), then you shouldn't need to give a PG. In any event, if you've got collateral - and you'd be surprised what you can use as collateral, including accounts receivables - then you may be able to get a business loan rather than what is essentially a big-time personal loan.

Obviously, I don't know your FICO or PAYDEX scores and I won't ask. But if you've got AR or maybe big company assets (I'm talking trucks or big, immovable machines, not PCs), or a ton of inventory with proof of your sales for the last few months which show that you're bringing in the bucks, then a bank might look favorably upon your loan application. Can't hurt to check with the bank where you've got your business bank account.

I realize that's a lot of qualifiers. Like I said, I'm trying not to sound salesy and I'm also trying to set expectations and not steer you wrong.

But whenever you can get out of giving a PG, do so.
myusername1
 
  2  
Reply Wed 25 Nov, 2020 01:09 pm
@jespah,
That is helpful. Thanks for your input!!
jespah
 
  2  
Reply Wed 25 Nov, 2020 01:44 pm
@myusername1,
You're welcome. I'll go ask my boss for a raise when he gets back from Thanksgiving. He'll be in a turkey coma, so maybe that'll work Wink
0 Replies
 
 

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